Rockwell Automation, Inc. (ROK) Earnings Call Transcript & Summary

Okay. Thanks, Nick. So Digital Threads, Digital Twin, all of these concepts, so you can hear them all over the place and what do they mean? And how much are they integrated and implemented by different companies? It's always like this misconception is like everybody is talking about having the Digital Thread, but in the reality, you would see very few, if any, of the companies being able to claim that the -- all of the offerings, starting from the requirements through the engineering and manufacturing and after sales, is fully connected. So we tried a throttle to change this perception. So like 5 years ago, our CEO, has asked the senior leadership, how do our customers at Rockwell perceive us? Do they perceive us as a digital transformation company? As a digital technology company? Or do they see us as the mainly automation hardware provider type of a company? And the results were not that good very -- it was a single-digit percentage of people who actually saw us as playing a significant role in this space. So from that point in time, Rockwell was on a spree of acquiring, buying the good digital transformation technical companies in the manufacturing OT space and some of them even in the IT space, in order to be able to create the element of this Digital Thread. And after that period of time, after the Fiix and Plex and Emulate3D, a few other companies like -- have been acquired. It was -- there was a need to have a company that would be able to work with the clients to integrate and implement different pieces of software and provide the consulting services around that software or putting it together in the form of a Digital Thread. That's when Kalypso came along for a ride. And that was like 3 years ago. So from that perspective, we looked at it and assess it. Where do we stand as Rockwell Automation in terms of Digital Thread capabilities? So we have the integral part. We have a very strong MES system, which is leading the way, which is called FactoryTalk. And with the acquisitions of Arena, Emulate3D, Plex, Fiix software, we do have the, if you want to call them, point solutions in the sphere of the Digital Thread in. So we also partnered with several companies and that we consider like really good companies to go to market with like PTC Solutions, Cognite and Ansys. And having now the Kalypso, which can deliver the value, we think that we have all the integral parts to create what is called the art of the possible of the connected Digital Thread. As I said, quite a few companies talk about that in a visionary terms. And often, when it comes to being able to demonstrate the Digital Thread, you're going to see a bunch of videos. And if you see some of the like live connectivity between the data, there's going to be gaps, and those gaps are typically filled by videos or the manual hand out. So what we wanted to do over here is just walk the walk, not only talk the talk. It's like created a full architecture of the Digital Threads, again, from the requirements through engineering, manufacturing to aftersales, and implement it, and implement it in a physical setting, and also connect our Digital Threads with Rockwell's Digital Twins. So when we say Digital Twin, and that was one of the questions over here that we were getting, it is that we would be able to create the virtual representation of the physical objects, but connect physical and virtual together in the continuous improvement loop. So one gets the data from the other, gets the insights from that data, does the optimization or the improvement, and sends that improved information back. So continuous improvement loop, physical improves, virtual -- virtual improves physical. So that's another aspect of what we want to do over here, not only thread to the software, but also connect the software with physical devices like POCs and robots and CMM and CNC machines in order to be able to demonstrate the value of what we're talking about. So the next phase of our development is going to be the building of this demonstrator. So how does this look on the Level 3. So Level 3 is relatively -- when we look at the levels of development, strategic development, and then putting the architecture together, we go from Level 1, which is a very, very high level, to Level 5, which is a very granular level, while all of the business processes are connected to the degree of granularity where every single piece of information is being sent from one to the next with the feedback loops. So we have done Level 3, Level 4, currently working on the Level 5 of the connectivity of our systems. So what I was talking about when we talk about the automotive industry. Automotive industry typically uses APQP phases. And you can see those like at the top over here of the slides, planning and program definition, product design development, process design development, product and process validation and production assessment and continual improvement. So we use the standard to build the elements of the Digital Thread. So we're going to start with the requirements and model-based systems engineering and interconnected software in terms of the Codebeamer and Windchill from the PTC Corporation, we're going to pass the requirements to the product design, which is also like the PTC Corporations, like technology Windchill 3 or Onshape. Once we created the eBOM , we're going to connect to the eBOM and send the eBOM back to the product simulation and the optimization, which is going to be done in Ansys software, and we're going to be running different type of analysis on the product side, designed for cost, designed for manufacturability and so on and so forth. So after that, like our created eBOM with the approved engineering design goes into the process engineering element of it. So -- which is the integral part of the MPM link provided by PTC Corporation and managed within the Windchill. So this is where we're going to be creating the routings and the process operations that are going to be linked with the mBOM. In terms of the manufacturing engineering, we're going to be using the mBOM to create the process operations and the process steps that are going to be detailed for manufacturing in terms of assembly, robotics, machining, the other additive manufacturing, the other operations. So from that point on, there is the connectivity between the PLM system, if you wish, because this is mostly going to be managed by the Windchill PLM. And the simulation system, which is Oracle's acquisition Emulate3D, and Vuforia, which can provide artificial -- like artificial intelligence XR view into the data. So Emulate3D is the manufacturing simulation company. So we would be able to simulate the manufacturing processes and also do the virtual commissioning of these manufacturing processes. On the step 6 is executed, we create something which is called a work package, a work package being composed of the elements of the process and product information. So we're going to have the routing, we're going to have the eBOM. We're going to have the mBOM information. We're going to have the information, which was derived from different type of simulations that we have done, and we pass this work packaging information into both manufacturing execution system and the ERP system. So in our ERP system, we will be doing all the financial-related stuff, so including the procurement, but also [ NBSC ]. We're going to do MRP and manufacturing, planning and schedule. So from the ERP, which is double connected, as you can see over here, this information, when we create the production order, is going to be passed to the manufacturing execution system, which is going to be also connected with the PLM system. In the manufacturing execution system, we want to be able actually to account for the quality through the usage of our Fiix and Plex systems. And our FactoryTalk production center, MES systems, is going to be like the executor of all the transactions on the shop floor. In the end, to go and finish the journey, there's a customer experience, warranty claims, aftermarket dealership like connectivity is going to be done through newly acquired ServiceMax offering by the PTC Corporation. So in this case, what we can say is like that there's a lot of feedback loops. And it's really, really important that we do have the feedbacks between the systems in order to be able to pass the information up and down the Digital Thread. So we're going to be talking about that, the backbone of these systems, it's going to be built on like the platforms with the FactoryTalk, Plex and ThingWorx, where we would provide quality compliance and sustainability. And also, on top of this, like the emerging technologies that are being used more and more as part of the Digital Thread, like data science, artificial intelligence, machine learning and extended reality, will be put on the top of the thread that we are building. So that's the Level 3, we have this much more details. But the key question over here comes is how are you going to glue all of these things together? It's easy to buy the best-of-the-class pieces of software that are point solutions, and it's very difficult to have the information shared. So typically, what the companies do is -- they do like they sell systems, they create a platforming software. But the problem with the platforming software is the price. And once you actually buy it, then you needs to buy all the other platforms, platformic applications, which typically never ends. And you're just working with one vendor, which increases the risk level. In this particular case, Rockwell Automation has partnered with Cognite, and we're using the Cognite Data Fusion technology. And we rebranded this technology, and we now call it FactoryTalk Data Mosaics. And so the difference between the 2 is that Data Mosaics gives us a lot of connectors and extractors on both sides that we're going to be using to connect the different pieces of technology. So I'm going to talk about that on the next slide, but the key offering over here is capability to connect to data through the different systems to figure out which data objects are stored in different systems and disconnected may actually represent the same object moving along the Digital Thread. So you first need to infer that the objects are the same and then create the implemented connectivity between these objects in order to create the Digital Thread. That's much cheaper option and significantly faster than creating a platformic software. So this is the glue that we're going to be using to connect the data. So how does this work? Just like we do have different sources of data that are available, they're going to be coming from historian sensors. Like if we look at the really a Level 1, I'd say 95 chart labs, QMS, CMM systems or like a little bit higher, like from the ERP, PLM systems or engineering software, some models, 3D images and docs. So we do have these connectors that we are building a light now extractors really to extract the data from those systems. And then we have the capability right now to do the proper data contextualization and to figure out, for example, through the product IDs that are being used in the PLM system, in the ERP system, in the AMDS system, through the machine learning-based technology, which can be prebuilt, which can be custom made or which can be rule-based, or we can even use the manual SME-based type of connectivity in this case to find the links between the objects in the disconnected systems. These links can be built deep in the documents, into images, into 3D data, and they can be based on a different type of attributes. So the machine learning system that we have over here is going to try to recognize the connectivity between the object. And it's going to give a person who implements the system very clear insights of what has been inferred, and its app to the person, the architect, to accept or deny or reroute those assisted links like by the machine learning system. And then once you have those links and you link the different systems and the objects that are within, what you're going to do, you're going to connect those, and you're going to expose them through different systems to get the value. So you have the Cognite Digital Thread now created. Now you're going to be able to pass this data along the Digital Thread, either to a different application or through data science like IDE or to any other industrial digital application over here. So this is a breakthrough for us to be able actually to use this technology in order to connect the disconnected applications. So in terms of like how this is used, how do we bring back to -- what is important and how do we follow the strategy? How do we bring this story line to somebody who is relatively new to the concept of Digital Threads and Digital Twins? So we created one illustrative automotive use case of how we would be tracking and managing the change in between the systems. So for example, if in your simulation in Emulate3D, manufacturing simulation, you have a robotics spot line, and you're trying to do the spot welding on a car door. And while doing the simulation, you see that the robots with the weld gun hits the side of the door. So there's obviously a collision. So then you do the analysis from that point on in Windchill in a step 2 to figure it out in the virtual build review or where is that coming from. And then, for example, we can actually deduct from that point by analyzing the simulation data that it could be a twofold there. It can be coming from the product side. It can be coming from the process side. If we want to then fix the product error, it's fully connected information that is going to be moved through engineering, change messaging and the process change messaging back to the design, and that the designer would actually change their position and the location of the weld itself. It's going to execute the product changes, and it is going to confirm the new design and rerun the simulations to assure that structurally, mechanically from the product side, the product is stable. At the same time, in parallel, in terms of the concurrent engineering, the process engineer is going to now reassess because now we are thinking that we need a different weld gun because it's a specialty weld gun. We don't have it anywhere right away. So we need a different weld gun. It's going to create different process change. So this process change request is going to be happening. And we are going to advance the process change and the process operations and the process steps and consequently work instructions on the planning stage to be using the new information regarding the piece of equipment that needs to be replaced. Once we do that, in parallel, as we were talking on a product and a process manufacturing or industrial engineering side, we would be able to bring the new system with the replaced like -- with the replaced equipment and with the relocated position for the -- for the spot weld back to the Emulate3D and resimulate in order to be able to determine that now the process works well. So then we push the information that we have from our simulation into the MES system. In the MES system, you're going to get the full package, including the work instructions. And you would be able to see to check whether it -- within the inventory, you have the info -- like any inventory, like availability for the new weld gun. If it's there, good use it. If it's not, then there's going to be the connectivity to the ERP system for the procurement in order to be able to order a new weld gun from a supplier. As I said, consequently, all of the work instructions based on the change processes and the change resource and change product information are going to be automatically generated for the workers on the shop floor. So this is how we actually looked at this. And we said, okay, Level 4 information that we need to do, let's decompose the whole process, APQP process that we have over here in the bunch of vignettes, and these vignettes represent business processes on Level 4 and the information that is going to be going from one business process to the next. So when we look at that, we're going to say we have the huge area of the product design and simulation, process design and simulation, manufacturing, planning, scheduling and procurement, manufacturing execution, Industrial Internet of Things, data science, artificial intelligence and customer experience and aftermarket. So we are looking at these sections of connected business processes to be interconnected in order to create the Digital Thread. So this next phase that we are building right now, we have gotten the funds and the excitement within Rockwell Automation, to be able to take the architecture that we have built. We do have the team at Kalypso that is going to be building this, and we're going to go to our innovation and expo centers. And we have multiple of them. We have one for the EV vehicles in San Jose in California; one in Milwaukee in our headquarters. And we are contemplating right now, putting one in Germany because that's the center of the automotive industry for Europe, and possibly one in the Metro Detroit area where our Plex get orders is in Detroit, Michigan. So we're going to be building these physical stations that are going to be running the roles of the actors in the Digital Thread process, where we're going to be installing the software. And then we are going to be able to use any type of data structure, but it's a single data structure. It's a single use case over here. And then move this data structure along the Digital Thread. But not only move it unidirectionally, but also when we have the manufacturing engineering change, we would be able actually to track and trace how this change is being propagated upstream and downstream. And that's the whole point of the Digital Thread, upstream and downstream. So how is this going to help our customers? Well, there will be no more chasing, or to the lesser extent, it would be chasing through PowerPoints, through visionary statements, through videos. It would be a vis-a-vis type of experience. Now we are in the age of experience, we would like our customers to come to our innovation centers with their own data and use the design thinking rooms to work with us to create the solution together and use the data and put it directly through the Digital Thread and see how the data would perform, and then decide of how we could help you along this way. So that's, for the most part, the vision. This vision is supposed to be completed by the end of the year. Our logic over here, the planning, the investments from like Rockwell Automation, gives us the expectations that most of the work, if not all, we would be able to complete in our innovation centers practically by the beginning of the next year. So I'm going to bring it back to Nick to do the conclusion and to talk about our sample case study, and the practical next steps over here.

Perfect. Thank you, Alex. So I'm just going to briefly walk us through a couple of examples of how we've partnered with electric vehicle and battery clients to help kind of make the Digital Thread, where we've been discussing the concepts earlier on this call and help making those concepts a reality. So you can see on the top how our case studies orient to the end-to-end Digital Thread that we've presented. Basically, the first example is going to show how we helped a client bring a conceptual design of the Digital Thread all the way from product design downstream to the customer experience. Whereas the second case study is more of an implementation of how we built a unified cross-platform Digital Thread change management solution that spans product design through manufacturing execution. So under the first one, I think, to set the stage, in this case study, we were contracted by a new entrant in -- a new EV manufacturer that was struggling. They were facing some of the challenges that I talked about earlier in the call today, to meet an aggressive delivery commitments that they had made to investors. The -- they were -- they needed to concurrently develop the product, the manufacturing process, the business process and the architecture of enterprise systems as well as their connections. And all of this kind of concurrent development and complexity caused them to severely underestimate the effort required to get ready to launch scaled production. So when we first arrived at the client, we quickly identified kind of a lack of connectivity between engineering and manufacturing activities as being a major bottleneck or constraint to bringing their product to market quickly. End-to-end business processes were not established. And the enterprise systems, primarily PLM, ERP and MES, in this case, we're not connected. And this was resulting in frequent failures in miscommunications. For example, ordering parts of the wrong version in manufacturing because he didn't have proper version control from engineering, and similar communications going back upstream to engineering. But this is kind of leading to additional costs and time and kind of a spiraling project time line. So what we did is we worked with the client. We identified a number of critical business processes, and we built a blueprint that showed how those processes fit together end-to-end, kind of to form the backbone of the Digital Thread. And we supported the implementation of several of those business processes, both with the process itself, but also the key enterprise system or software that would facilitate and make that process a reality. And really central to this is that we architected, and we implemented a unified data hub as a single source of data for the Digital Thread, passing kind of data connectivity between engineering and manufacturing and really directly addressing the biggest challenge that we identified. The result of all this sustained effort was significantly improved cross-functional communication and efficiency in kind of the entire organization and being able to realize an idea and turning it into an actual product that's being manufactured and particularly tying the engineering and manufacturing functions together. This has enabled the client to better kind of improve their development speed for both product and process and enable them to better meet the commitments that they have made to investors. So second case study. This is also from a electric vehicle manufacturer that's facing kind of a similar position to the first one. They were struggling to cope with the large volume of product changes because they were kind of early in their product journey. They were -- there's still a lot of flux, and they were frequently initiating product changes because of things that they learned about the product later in the process. So after -- so we kind of brought in -- we were kind of brought in to look at the situation and kind of, I think, identified the lack of a single system or a business process for change management as being a major constraint for them. So after understanding the situation, we kind of came in and we conducted a series of requirement workshops with different departments, both upstream and downstream, so both within engineering and also within kind of process planning and other downstream processes and created a optimized change management process. We defined a checklist based on kind of leading change management practices that showed each function, what they needed to be managing at each maturity stage of a change. We worked with the client to define an architecture data model and implement that design with a set of core change management processes on a platform that spanned across several enterprise systems, primarily PLM and ERP. And finally, we tracked the improvements by making visible key performance indicators for the change process. So primarily, the speed of change implementation and the number of iteration loops required for change, which would kind of help highlight some of the improvements in transformational results that this project had. And the result was really a single source of truth for change data, a shorter time required to execute a change, and ultimately improved traceability between engineering and manufacturing changes, particularly in a high-flux environment that was able to be transformational for this client.

So I know we only have a couple of minutes left. I'll quickly walk through this. We quickly want to get through this poll question. Just want to understand kind of -- we talked about some of the realities of the Digital Thread earlier, but we want -- now I want to kind of understand your organization's vision. So question to you is how mature is -- do you think your organization's Digital Thread vision is? Does the concept not exist? Is there kind of an initial vision to connect certain solutions, certain point solutions? Or is there a vision for a full end-to-end Digital Thread mature and fully form? I'll give the floor about 5 seconds. Okay. And I think the results are somewhat informative here. It looks like for most are either in a place where the concept doesn't really exist or there's an initial vision, but isn't really fully formed. And I think that's typical, and it's something that I'll talk about kind of how to address in the next section of the presentation. So basically to what we found is that most of our clients are in one of those two places from that hole. So either they have a vision in place and they're ready to stand up and scale MVP for the Digital Thread, or they're in a position where they're less certain of what to do next. They don't really have a strategy in place for Digital Thread, and they're really ready for more of an assessment strategy work. So I think it's important to realize what stage you're in, like do you have the vision in place? Do you have alignment in place? If so, I think you're ready for more of a execution-type projects. So we'll start to stand up and build what those minimum viable products would be for the Digital Thread. But if you're not in that place yet, if your program momentum is stalling, if you're in a place where you're struggling to scale the results from what point solutions you do have, I think what we found is that really the right step is to kind of take a step back and do a short strategic and assessment type activity to really make sure that you're aligned as an organization and also make sure that you have a road map that's ready to execute. And I'll close on this early, the brutal reality is that the majority of change initiatives taken up by organizations, fail to achieve the desired transformational results. And from our observations and experience, this can be true of Digital Thread initiatives as well. I just want to highlight the importance of an aligned and cohesive organizational vision when it comes to the Digital Thread and one that's really grounded in business priorities. And I think it's important that there's an overarching value case and a commitment to that value case within leadership, but also a road map that contextualizes priorities and accelerates the path to value. What we found is many of the most advanced organizations don't build the Digital Thread in one big bang. They usually start small with an aligned vision and incrementally connect more and more nodes of their business process along that vision. And if you don't have that in your organization today, I'd say, consider an initiative such as the Digital Thread assessment to help align priorities and build a cohesive vision for the Digital Thread. So we have one final poll question. Just when does the organization plan on taking the next steps to enable the Digital Thread within the next year, 1 to 3 years, 3 to 5 years, or 5-plus years? Okay. And I think we're seeing -- I'm just going to move quickly. I think we're seeing some mixed results again. But I think it looks like some are -- I think something they're ready to execute today, whereas others think they're a few years out or maybe even many years out. I think that's consistent with what we've seen. But yes, I know we're out of time. I just want to thank everyone for taking the time today to discuss this topic with us.

Yes. Thank you both so much. Great presentation. Lots of really great information. We are out of time for today. So if you had questions and you ask them in the chat or if you haven't done that yet, please go ahead and enter those, and we will get answers to you here within the next couple of days. I do encourage you to fill out our survey at the end of this webinar. And if you would like any follow-up information or more in-depth conversation, please make sure that you check that box within that survey, and we will make sure to connect with someone. Again, thank you guys all so much for a great presentation, and we look forward to the next one. Have a great day.